What is a compound tariff?

A compound tariff is characterized by consisting of two components: a fixed amount and a percentage of the value of the imported goods. This means that when a good is imported, the importer must pay both a set fee (the fixed amount) and a variable fee that depends on the total value of the goods. This two-tiered approach allows governments to generate revenue more flexibly, capturing both a flat rate for administrative purposes and a percentage that scales with the value of goods imported, reflecting their market worth.

This structure can impact trade by providing an incentive to import lower-value goods, as the percentage component would result in a lower tax burden on cheaper items, while still generating revenue for the government through the fixed fee. Understanding how a compound tariff works is crucial for analyzing trade policies and their effects on international commerce and domestic markets.